If you're someone that reads a newspaper, listens to the radio, watches T.V. or surfs the internet, then you've obviously heard and seen the zillions of advertisements that guarantee quick and almost painless debt relief, and the most widespread magic potion right now is debt settlement
If you were drowning in debt, and got a reply from a debt settlement company that read like this, "We are generally able to settle debts for about 40 cents on the dollar and have our clients debt free in a very short period of time on a low monthly payment plan and we charge the lowest fees in the industry".
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Then you'd most likely feel that your prayers had been answered, and they might have been, because most debt settlement companies do work hard for their fee, and they do help people.
The biggest problem that presently exists is that the continuing financial crisis has spawned a multitude of new companies that just want to rip off people that are already in big trouble, and right now the debt settlement industry is largely unregulated, and only about a dozen states have laws that govern debt settlement.
The next biggest problem is, that most Americans with serious debt trouble have almost no knowledge about the different ways that exist for getting out of debt, and they usually have next to no idea of the differences between, credit counseling, debt consolidation and debt settlement.
All three of the above can work, and a good credit counseling agency will quite often recommend either debt consolidation or debt settlement, but the two things are completely different and what suits one debtor won't suit another.
What They Are And What They Aren't
Debt Consolidation
a) Using a single loan such as a home equity loan to pay off multiple debts at full price.
b) The biggest advantage is usually the lower interest rates, but debt consolidation loans are becoming much more difficult to obtain.
c) This option is generally credit score neutral.
Debt Settlement
a) You'll generally have to owe at least $7,500 and be at least sixty to ninety days in arrears before you can enter into the debt settlement process.
b) During the 60-90 days you will be pestered by debt collectors.
c) Not all companies will agree to debt settlement although most will, and they all prefer it to bankruptcy.
d) You will have smaller monthly payments.
e) You will damage your credit rating, but how much will depend on your previous rating.
Credit Counseling
a) Involves paying a small fee, which is usually under $100 to a service that offers budgeting advice and will often negotiate lower fees and interest rates with debtors for an additional monthly fee.
b) Debtors pay the counseling service, which in turn pays the lenders.
Bankruptcy
a) A federal judge will consider your debts and assets, and decide which debts get paid and which get erased.
b) Bankruptcy is more and more frequently the only alternative for many people, but it has the longest negative impact on credit ratings, and it is quickly becoming far more complicated to do than it once was.
How Many Companies And How Much Money?
According to the debt settlement's lobbying group, The Association of Settlement Companies (TASC), there are perhaps 1,000 firms that presently offer debt settlement services, and an amazing $20 billion in consumer debt is currently enrolled in debt settlement programs.
What Can Be Done And What Can't
Andrew Housser, who sits on the board of The Association of Settlement Companies, said that settlement firms offer an important service to customers in certain circumstances, but added that the big influx of new settlement firms, many of which are being run by former mortgage industry workers are getting the industry a bad name.
"Hundreds of companies are flooding into this and frankly some of them don't know what they are doing. There's been explosive growth, and unfortunately you get some good players and some bad players".
TASC (The Association of Settlement Companies) is actively supporting regulation in 24 states, in an attempt to reign in abusive companies, and it's also self-policing its 200+ members and investigating complaints against other settlement firms lodged via the association's web site, TASCsite.org.
Housser also said that credit counseling isn't a viable alternative for many indebted consumers.
"For example, consumers who enroll in credit counseling generally still face high monthly payments, because counselors can only negotiate lower interest rates and friendlier loan terms and not principal reductions and many debtors can't afford those payments".
He then offered an advantage that debt settlement sometimes has over credit counseling.
"Some people fit in sweet spot of debt settlement, where they can't afford credit counseling programs but still have some income. We give them a program to work out their debt for less than face value and typical monthly payments for debt settlement are 1 to 1.5% of total debt, vs. 2 to 3% for debt counseling. Total settlement fees typically average about15% of debt, meaning a consumer with $10,000 in debt would pay $1,500 to a debt settlement company for help".
He justified the seemingly fees, saying that "debt negotiation is a very labor intensive business and legitimate companies clearly list their fees up front, and don't pile on extraneous charges".
The Best Advice
If you've tried different debt reduction techniques and none have worked for you, and you're getting deeper into debt every month and have to do something, then be careful not to jump out of the frying pan into the fire.
Regardless of whether you decide to go to a credit counseling agency, or a company that offers debt settlement and/or debt consolidation, only choose a company that is BBB (Better Business Bureau) affiliated, and don't sign anything that you don't fully understand, even if it means having a lawyer explain the finer details to you.
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